SolarCity Couldn't Save Me Money, But It Might Make Me Rich

A few months ago, I called SolarCity (NASDAQ: SCTY) and met with one of their salespeople. It was a fantastically simple and easy process, only involving a little work on my end to produce the past years' worth of power bills. However, to my surprise, SolarCity not only couldn't reduce my costs, but it was going to cost me more money to go solar. Not only that, I would be signing a 20-year contract, with no guarantees that it would ever reduce my power costs.

Most likely it eventually would with my power company's history of price increases, but with no guarantees, my wife and I decided to stand pat for now. I may call around to some smaller, local installers, possibly one that offers solar panels from SunPower (NASDAQ: SPWR) , but for now, I'm firmly in the camp of those that can't save any money and therefore doesn't see any incentive in switching.

While I'm just one household, what if households like mine are the majority? Is all the expansion and growth in domestic residential solar coming to a screeching halt in the next few years? What's an investor to do?

Honestly, I'm probably not typical of the market opportunity. Let's take a closer look.

Why investors love SolarCitySolarCity has grown like wildfire over the past year and a half, and is projecting it will install double power capacity in 2014 versus what it installed last year. The remarkable thing about SolarCity's business model is how its contracts -- typically 20 years in length for residential customers -- offer such substantial long-term cash flow. Think about it this way: The company could stop selling new solar systems right now, and would keep generating revenue for 20 more years. How many businesses can you name that are in that situation? It's kind of amazing.

It's such a great concept, that competitor SunPower has increased its stake in the solar leasing business in the U.S., with more than 20,000 customers and $220 million in financing available with Bank of America, in addition to the financial backing of majority shareholder Total SA (NYSE: TOT) . Total also opens the door for SunPower to compete for utility-scale solar projects all over the world, like the 86 MW project SunPower is building in South Africa.

Homebuilders represent the next phase of residential growthSolarCity has announced a number of partnerships with homebuilders in recent months, including a deal with 20 homebuilders in Oregon in January, and more recently with privately held Taylor Morrison in Arizona. This is an important business for SolarCity to enter, as homebuilders are largely competitors for solar business, operating solar installations as side businesses in addition to offering solar for new homes. SolarCity also has worked with Shea Homes in Arizona, and PSW Homes in Texas.

The opportunity is huge.

Consider this: SunPower is already partnered with seven of the 10 largest homebuilders in the U.S. Why is this important? Here's a look at historical home construction:

As you can see from the table above, new home construction has averaged around 1.4 million, and largely correlates with household formations. As you know, we are still emerging from one of the worst recessions the country has ever experienced. One of the effects of this recession was a larger than usual number of young people remaining at home, or returning to home, versus moving out and starting their own household. Household formations are finally beginning to rebound, though.

The result will be housing starts returning to historical levels -- close to 50% above current construction -- and you can bet that a growing number of homebuyers will be interested in solar due to its cost and environmental benefits. SolarCity needs to be a part of this trend, and the coming months and years will likely lead to more partnerships with builders.

SunPower utility install. Source: SunPower

Utility-scale solarSunPower is working with Berkshire Hathaway subsidiary Mid-American Energy on one of the largest solar projects in the U.S., which will generate a combined 579 MW upon completion. Its partnership with Total, as mentioned above, will lead to more of these opportunities, due to Total's reach and breadth of operations around the world. Total's 67% stake in SunPower is a boon for shareholders of both companies, due to the upside it offers Total, and the strong financial backing it gives SunPower.

SolarCity is working with Hawaiian Electric to develop a solar energy project on O'ahu, the second of its kind from SolarCity on Hawaii, following an earlier project on Kaua'i. Combined, the two projects will generate close to 30 MW of energy and displace millions of gallons of fuel oil imported to the islands to generate power. While the size of these projects pales in comparison to some of the larger projects that SunPower has completed or is working on, SolarCity is ramping things up. The company also signed a partnership with Direct Energy in 2013. Direct Energy operates natural gas and electric utilities in 21 states, D.C., and most of Canada, serving more than six million customers. Partnerships like this will lead to growth for years to come.

I admit it: I'm below average -- which is great news for SolarCity investorsSimply put, my family's power consumption is insanely low. Our average power bill is about half the average for the area we live in, according to IEA data from 2012. While I hate admitting I'm below average in anything, as an investor in SolarCity, it's reassuring knowing that the vast majority of consumers are more likely to be able to find compelling value in switching to solar. And since SolarCity is my second largest stock holding, I think I'll hang onto my shares.

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If I read this article correctly it claims the writer could not save using a solar power installation... Anyone can save using solar, a 1000 watt panel or two, a charge controller, a couple over the counter deep cycle marine batteries and an inverter are the basic equipment needed. It would run lights a window air conditioning unit to supplement heating and cooling even keep the fridge running. It just takes time for the savings to break even with the cost.

You'll save far more money by purchasing a Hyper X Solar system, Hyper X solar offers a better PTC to STC ratio "Real World" performance according to the California Energy Commission's performance rating listings than over 100 of SunPower's solar panel models. Hyper X solar also offers an incredible -0.27%/degree C temperature coefficient rating for awesome performance in hot/warm climates and best of all Hyper X solar systems are priced at nearly half the price of a SunPower solar system and nearly 1/3 what it would cost you to rent a solar system with a $0 down, 20 year solar lease.

Here are the real reasons why most Americans won't save any money on a solar lease or PPA when compared to a solar purchase.

On the surface, getting a solar system on your roof from a solar leasing company for no money out of pocket might seem like a great deal, but here are the facts behind this type of rental financing: When you sign that solar lease contract you'll be forfeiting the 30% federal tax credit which can typically be worth about $3,500 to $10,000. You'll also be forfeiting any applicable cash rebate or other financial incentives. After collecting both the 30% federal tax credit and any cash rebate, the leasing company will also apply accelerated depreciation. Despite applying all of the financial incentives, on a $0 down 20 year solar lease, the leasing company will then charge you 20 years worth of leasing payments that many times will include up to a 2.9% annual payment escalator that will raise your monthly payment, every year for twenty years.

The leasing companies will try to convince you that a solar system requires a lot of maintenance and expensive insurance and costly monitoring when nothing could be further from the truth. Modern grid tie solar system require little to no maintenance and the bulk of any repairs are covered by the manufacturer's and installer's warranties. Solar panels and many inverters come standard with a 25 year warranty. Insurance can be added through your homeowner's insurance policy with little to no increase in your premium and many solar systems come standard with built in, web based monitoring.

The bottom line with insurance, repairs and monitoring is that a leased solar system will typically cost you up to three times more than a purchased solar system, so it is actually you who will be paying for these services, not the leasing company. The leasing companies will try to convince you that these services are free but with a system cost that's triple that of a purchase, these services are absolutely not free.

The leasing companies will try to convince that their rental financing is the only $0 down option in town, which again is not true. There are plenty of $0 down loans available that even offer tax deductible interest. Solar leases and PPAs do not offer tax deductible interest.

What's worse is that after paying 20 years worth of leasing payments that amount to triple the amount that you could have paid if you purchased your system instead, you won't even own the solar system. It will still be the leasing company's property. If you want to own it after paying your lease off, you will still need to buy it from the leasing company at fair market value. All this for only a 10 to 15% reduction in your electric bill. This is just the tip of the solar lease and PPA iceberg. For more information simply search the term solar lease disadvantages in any major search engine. There's a lot you should consider before signing that airtight 20 year lease contract.

There is a terribly basic issue at play here - inefficiencies of solar ELECTRIC power verses solar WATER heater. Electric power generation from solar panels is maybe 10% efficient. Solar water heating is closer to 70% efficient in the southern tier states. This means that for every square meter of solar device surface area, the water units will generate 7 times the amount of power the electric units will generate. Approximately 30% of all household power is used to heat water. A properly sized and designed water system will not only replace virtually all the the power used to generate hot water but actually stores the power (in a hot water tank) during the night where there is no sun and during several days of cloudy skies. Additionally the water systems require no exotic and expensive materials, are easily manufactured, no backup system other than a large water tank and are much cheaper than any equivalent sized electric panel. Their typical payback period is from 5 to 7 years. They may not have the wow factor of electric panels but where else can you cheaply and easily replace 30% of most household power use with nothing exotic?

@jrblyth - It's about 10 degrees outside where I live right now, and our water heater is natural gas fired. Electricity is 2-3 times as expensive as natural gas per unit heat energy, depending on the gas market and where you live. It wouldn't make sense for me to choose a solar water heater over solar electricity, although frankly with the startup costs and how little sun we get in Wisconsin, neither pays. Very few homes have them here, and the few panels we see are paid for with government money.

Above all else, SolarCity is a sales organization. They have numerous distribution channels (largest being HomeDepot, which generates close to 50% of the company's leads) and hundreds of salespeople in their territories. But the one problem I have with the company is a simple one. With all that looks so promising going forward - march to million customers, expansion to different regions and perhaps overseas, continued dominance in the residential marketplace ...

Why then did two of the most important people in the company (the Chief Revenue Officer and VP of Sales) leave the company in the last three months, along with many other higher level personnel in sales, marketing, product development, etc.? Again, if the growth is unstoppable, why did the people most responsible for tripling SolarCity's marketshare and building the national sales force, just leave? And not just exit the company, but exit the industry.

That's a gigantic red flag for the company, especially with the replacements being so underwhelming.

SolarCity leases are a rip-off for consumers. That is why investors like SolarCity. The hardcore solar people would never sign up for one of their terrible leases.

If you want solar then solicit multiple bids to build a system and go with the best bid and pay cash. Take out a home equity loan to do so. Or better yet, install yourself if you are a competent DIYer.

What happens to these leases when the house is sold? Does the SolarCity lease have to be part of the sale? Can the panels be moved? Most Americans do not stay in their home 20 years so what can, or must, happen when a sale occurs is important to me as a potential SC investor. Anyone?

Jason, bad news, my energy use was too low also! With a small house and small family, me and son, CFL's slowly being swapped out with LED's and mainly low power appliances, our use is too low for Solar City to play around with - they won't give us a quote.

The good news is that for less than $2500 dollars, zero down thanks to the credit union, I can install my system (1.3KW) and have an electrician wire it to the grid.

@btc909 The two ways he is probably thinking SolarCity will make him rich. Number #1 The stock he owns in the company and #2 the referrals program is a way to earn residual income. Check that out here: